As I sit here writing this column, the U.S. national debt is climbing past $14.25 trillion, or an average of nearly $46,000 for each citizen. Each day, that national debt rises by about $4.1 billion, as 40 percent of the 2011 federal budget is made up of borrowed money. Of the Obama administration’s proposed $3.7 trillion budget for 2012, 30 percent will go to Medicare and Medicaid, 22 percent will pay for Social Security benefits, 19 percent will go for defense-related programs and nearly 13 percent, or $474 billion, will be used to service the existing debt. So just what does that have to do with mortgage finance? Everything...

Tuesday, April 19, 2011

Although it’s difficult to find anything positive in the likelihood of higher oil prices for the foreseeable future, one silver lining is that it makes renewable energy much more competitive.For the home building industry specifically, a combination of lower prices, constantly improving technology and financial incentives including tax credits and lease programs are allowing builders to bolster their own solar power initiatives while also better separating themselves from older (and often discounted) resales.

The idea for offering solar energy in new homes is certainly nothing new:when I founded a Technology Task Force for the BIA of Southern California ten years ago, private builders such as Shea Homes were already test-marketing them as options in certain markets.By 2008, Shea decided to make solar power systems a standard feature just as federal tax credits were becoming more robust.And this year, after also previously offering solar systems as add-on options, KBHome took the plunge, offering basic solar power systems as standard features along with more robust system upgrades.

For large builders which enjoy economies of scale, they can offer solar systems for a fraction of the retail price which buyers could obtain on their own.For example, if buyers of a KBHome want to upgrade from the standard $7,500 system (which is estimated to cut electricity bills by an average of 30%) to the highest upgrade (which could cut them to nearly zero), buyers would pay $5,000 versus the $15,000 retail cost elsewhere.

For smaller builders not quite ready to offer solar systems as standard features, there are several options available to entice buyers to buy them as an upgrade.Besides federal tax credits of up to 30% of the system’s cost, Energy Efficient Mortgages (also known as ‘green mortgages’) offered by Fannie Mae, FHA and the VA allow borrowers to roll the cost of energy-saving upgrades into their mortgages.Even better, they can allow underwriters to count the estimated monthly savings as extra income, which for strapped buyers can mean qualifying for a higher loan amount.

Of course major solar companies such as SunPower and SolarCity also offer their own financing with interest rates ranging from 5% to 8% depending on the term (generally 5 to 20 years) and no pre-payment penalties.More recently, however, the industry has been promoting leases for these systems, which work a lot like leases for new cars with advantages such as low or no down payments, lower monthly payments (which are often less than the monthly savings in utility bills) and end-of-term options such as a renewing the lease, buying it outright or returning it to the company.

Still, for now the industry remains largely reliant on federal and local incentives, which is why California-based SolarCity is only expanding into states which offer them.Their hope is that once they create larger economies of scale, the costs of the systems will be low enough to be competitive without any incentives at all.

At the same time, improvements in technology will also do their part.According to Bloomberg New Energy Finance, the installation of solar systems worldwide will almost double by 2013, while manufacturing capacity has almost quadrupled since 2008, and will grow by another 43% this year.That will also mean lower per-unit costs, with the cost for rooftop systems already falling by 5% to 8% each year and expected to drop by half by 2020.In many sunny climates with high peak electricity costs, solar energy is already at parity with gas or oil, and will match that of coal within a few years.And that’s certainly a silver lining which can give builders a distinct advantage.

Thursday, April 14, 2011

For this year's PCBC in San Francisco, I'll be participating on two different panels discussing how and why traditional housing market research during the boom years (including consultants who were all too willing to write fiction to keep builder & developer clients happy) failed to fully recognize the financial cataclysm that was to come. Here's a description of the panel, which will take place over two days but focus on different issues:

The building industry largely missed the signs of the housing bubble, ignored its profound consequences, and adjusted too late. What went wrong? How can it be fixed? And, going forward, how can we develop a more objective and comprehensive framework of market-based due diligence? A panel of prominent economists, housing consultants, financial bloggers and market research data experts will discuss necessary reforms, the current outlook, and new tools to get a better handle about where the market is going.

I plan on turning off my censor completely for this opportunity, because by engaging in such deceptive practices, industry consultants not only tanked the housing market, but also played a minor role in destabilizing the global economy. Today, I still see those same consultants working within the industry, yet no one seems to care about the danger of history being repeated (hint: these guilty parties aren't going to warn you about their previous behavior in their marketing materials). If you choose a consultant who lies to you to get your business and then your project fails, guess who's to blame? YOU ARE!

If you're planning to attend PCBC, please join me and the following panel for what I'm sure will be a provocative discussion:

Attendees will hear a new outlook for the U.S., California, and Los Angeles economies, delivered by some of the state's most reputable forecasters, and revealing insights into the direction the economy will take in the near and long-term future. Some questions addressed will include the following:

Is California going to stumble or stride down the road toward economic recovery in 2011 and 2012?

How high do oil prices have to rise to significantly affect the economy?

How will the housing market's battle with distressed properties affect home sales and prices in California and the nation over the next few years?

Inflation? Hyperinflation? Deflation? Why are experts all over the map?

Are the conditions for business success still in place in California today?

What are the greatest barriers to California’s existing businesses? To entrepreneurialism?

The program will also cover one of the most pressing and hotly debated topics in the state: entrepreneurialism and California's competitive future. Charges of a hostile business climate in the Golden State have exploded in intensity since the downturn began in 2007. We have invited an exceptional line-up of experts from the worlds of venture capital, technology start-ups, banking, and journalism to debate critical questions that go to the heart of California's future success.

Monday, April 4, 2011

Just when you think the issues related to mortgage fraud couldn't get any worse, they do. Last night, 60 Minutes covered the story of lenders which outsourced their foreclosure process to outside firms, who in turn hired untrained bodies -- aka 'robosigners' -- for $10/hour to pretend they were officers of the banks and sign thousands of documents per day.

Only problem? Many of those forms weren't filled out correctly (often laughably so), which has slowed down the entire foreclosure process. Of course the banks which hired these firms -- companies such as Bank of America, Wells Fargo, Citibank and others -- deny any knowledge of these irresponsible practices. So who's going to jail for this huge fraud? As usual in this country, no one. They'll probably pay (another) fine and call it a day.